South Korean Bonds Fall as BOK Leaves Rate Unchanged; Won Drops

By Kyoungwha Kim -
Mar 13, 2013

South Korea’s three-year government
bond fell, prompting the yield to jump the most in a week, after
the central bank left interest rates unchanged. The won dropped
for a sixth day, its longest losing streak in 10 months.

The Bank of Korea kept its benchmark seven-day repurchase
rate at 2.75 percent for a fifth month today in a decision
predicted by 12 of 16 analysts surveyed by Bloomberg. Four
forecast a 25 basis point cut, after similar moves at reviews in
July and October. Incoming Finance Minister Hyun Oh Seok said
the economy may not achieve the 3 percent growth rate forecast
by the government, the Associated Press reported yesterday.

“Some investors offloaded their bond holdings on
disappointment after the BOK’s rate decision,” said Kong Dong
Rak, a strategist at Hanwha Securities Co. in Seoul. “But we
will have to wait and see what indication the central bank will
give in relation to the incoming finance minister’s view on the
economy.”

The yield on the 2.75 percent bonds due December, 2015 rose
three basis points to 2.63 percent at 10:20 a.m. in Seoul,
according to prices from Korea Exchange Inc. The Kospi index of
shares fell 0.6 percent.

President Park Geun Hye, who took office on Feb. 25, is
grappling with North Korean tensions, yen weakness that aids
export rivals in Japan, and a drag on consumption from elevated
household debt. Hyun told lawmakers yesterday that “short-term
policy support” is needed for the economy.

The won fell 0.5 percent to 1,102.44 per dollar in Seoul,
according to data compiled by Bloomberg. The run of losses is
the longest since May 16, 2012. One-month implied volatility for
the won, a measure of expected moves in the exchange rate used
to price options, rose 42 basis points, or 0.42 percentage
point, to 8.48 percent.

Hyun also told lawmakers yesterday that the country needs
to be “cautious” about introducing any taxes on foreign-
exchange transactions as imposing levies on trading may hamper
capital inflows.